Government of Defaulters, For Defaulters, By Defaulters
December 26, 1998
Since the Pakistan Peoples Party Government was dissolved in November 96 and replaced with a regime comprising the top most defaulters of the country, Pakistan’s economic woes have continued to multiply.
While the Prime Minister had promised to break the begging bowl, he has only succeeded in raising the country’s total debt to Rs 3,000 billion or nearly 80% more than the outstanding debt in November 96, without bringing any improvement in the economic and social sectors of the country. Inflation has skyrocketed while the economy is starting to shrink. The latest forecast of the IMF estimates an economic growth for Pakistan during 98-99 of 3% only, almost equal to its population growth. Revenue collections have fallen to record lows barely covering just one item of current expenditure, the debt servicing. The per capital income of the country has fallen to US $ 400 compared to $ 490 in 1996 reflecting a drop of over 20% in a period of two years. For the first time in its history, the country defaulted on its debt service commitments and other obligations. Consequently, its sovereign ratings have been lowered by Standard and Poor to CC, which is even worse than the countries that have actually defaulted. The mismanagement of the past 22 months of the Muslim league regime has brought the country to a stage of bankruptcy where we have accumulated debt arrears of over $ 1.5 billion.
As the economic crisis deepens, the spin-doctors remain busy with their endless bragging and indulgence in skulduggery. The recent statement of Finance Minister, Ishaq Dar in the Senate regarding the recovery of stuck-up bank loans is just one example of issuing deceptive and false statements to cover-up the complete failure in recovering bad debts (the term bad debts, defaulted loans, classified loans and stuck-up loans that are interchangeably used hereunder carry the same meaning).
The Finance Minister’s statement that Rs 34.167 billion has been recovered by the banks and DFIs during the financial year 97-98 is unbelievable as the same amount has been rescheduled or written off rather than recovered. As per his own statement, the amount of stuck-up loans has gone up to Rs 153.93 billion compared to Rs 141.34 billion at the beginning of the year reflecting an increase of Rs 12.59 billion during the fiscal year.
According to an earlier statement of the Governor State Bank of Pakistan, the amount of classified stuck-up loans as of March 31, 1997, the time when Mr. Nawaz Sharif took over as the country’s Prime Minister, aggregated to Rs 127 billion that has now escalated to Rs 154 billion. Thus there is an increase of Rs 27 billion in fifteen months from March 97 to June 98, despite the claim of recovery of Rs 34 billion which clearly indicates the pace of deterioration of the financial sector. The actual amount of bad debts are higher as the above reported figure has been artificially reduced through rescheduling and write off of Rs 34 billion, relaxation of prudential regulations by changing the basis of provisioning and liquidity injection of Rs 25 billion in UBL and HBL by the State Bank.
The cash injection by the State Bank of an amount of over Rs 25 billion to rescue UBL and HBL shows that due to excessive bad debts they were faced with acute liquidity crunch. The State Bank was constrained to substantially lower the liquidity margin requirements of the banks to release an additional over Rs 50 billion to the banking sector. The regime in collusion with the State Bank has indulged in “window dressing” to show an improved picture of the financial sector. A large portion of recovery claimed is nothing but a mere book adjustment with an intent to reduce the amount of classified infected loans to conceal the true state of our sinking financial sector.
But if we ignore the factor of window dressing and assume the amount of recovery to be correct, even then the amount of actual bad debts is much larger than the reported amount of Rs 154 billion as explained below.
The amount of classified stuck-up loans are computed by the banks and the DFIs in accordance with the prudential regulations issued by the State Bank. There are four ways in which this amount could be reduced: (1) through the recovery of these loans (2) through writing off of this amount; (3) through rescheduling; and (4) through changing the basis of computing the bad debts by amending the prudential regulations. Except for the (1) above, the reduction of this amount through the remaining three methods do not improve the financial position of the banks. The write-off of bad debts reduces the amount of defaulted loans but it only indicates total failure in recovery. Rescheduling normally involves revision in the terms of repayment such as the period and quantum of installments, and in Pakistan, it is largely done to show improved financial position. Again, it usually does not have any financial effect, especially when it is used as a tool of window dressing. Fourth method, the change in method of provisioning, through amendments in the prudential regulations also does not change the real financial position of the financial sector. For the first time in several years, large banks were unable to publish their annual reports within the stipulated time owing to unprecedented losses that their balance sheets would have reflected because of rapid increase in the amount of defaulted loans. Consequently, the banks were allowed extended time to prepare their financial statements but many of the prudential regulations were relaxed which resulted in reduction in the required provision for bad and doubtful debts and the amount of classified advances by approximately 25%. It was after such relaxation in the prudential regulations that the larger Nationalised banks prepared and published their annual financial statements.
Therefore, if we want to ascertain the real amount of bad debts that can be compared with the earlier reported amount of defaulted loans reported by SBP of Rs 127 billion than we should compute this figure after discounting the later three methods that have been used to artificially reduce the figure of defaulted loans, as follows:
Rs in billion
Reported amount of classified/defaulted loans 154
Add back: the amount rescheduled/ written off that has no
financial effect except for reducing the classified amount 34
Add 25% of the above amount to discount the impact of
relaxation of prudential regulations 47
Real amount of defaulted loans 235
The real amount of defaulted loans as of June 30, 1998 had gone up by Rs 108 billion reflecting a phenomenal increase of 87% in a period of only fifteen months. This means that nearly 40% of all the advances have become bad debts compared to around 25% when Nawaz regime was installed in the government. And these alarming figures do not consider the huge amount of borrowing by the public sector companies and corporations such as WAPDA, KESC, PIAC, Pakistan Steel, and other large corporations to finance their losses. This new borrowing estimated to be over Rs 40 billion in the last 15 months is irrecoverable due to rapid insolvency of these corporations. Very little provision has been made by the financial institutions on the fallacious premise that the government owed debts, including the amounts borrowed by the government corporations, do not become bad.
When the country’s Prime Minister happens to be the biggest defaulter of the nation, having defaulted on estimated loans of Rs. 10 billion, when the ruling party Ministers, members of the parliament and a large number of their family members and friends constitute the biggest portion of the defaulting segment of the country, this government is truly a “government of defaulters, by the defaulters and for the defaulters”. It is natural that in such a situation no change in the laws, or a selective persecution or repression could lead to any meaningful recovery of bad debts, as has become apparent from the dismal failure of the so called banking sector reforms and the state banks recovery scheme that appears to have been designed with the aim of favouring only the cronies.
One can turn the tide, and the economy around, by making a sincere effort to recover defaulted loans to revive the financial sector and thereby add fresh blood to the sluggish monetary circulation.
Mr. Nawaz Sharif is fond of involving the Military in every aspect of civil life, from collecting Census Data, to looking ghost schools, dispensing justice and checking electricity meters.
A much better way would be to task the Military with the goal of recovering bad debt by going after Bank defaulters. But then Mr. Nawaz Sharif would have to put the interest of Pakistan before that of his own family.
Is he prepared to do that? or must the country suffer?